Implications: Not much "news" in today's report on GDP, showing the economy expanded at a 1.9% annual rate in the first quarter, which ended almost three months ago. The growth rate was exactly as the consensus expected and there were no major changes to any of the components of real GDP. Nominal GDP – real GDP plus inflation – was revised up to a 4% annual rate, which adds to the case that the Federal Reserve, by keeping short-term interest rates near zero, is too loose. The most important news in today's GDP report was on corporate profits, which were revised up for the first quarter, particularly for domestic non-financial companies. Corporate profits are at a record high, having traced out a full-blown V-shaped recovery from the financial panic and recession. Profits were up at a 12.1% annual rate in Q1 and are up 10.2% versus a year before. Based on information out so far, we expect a growth rate in the 2% to 3% range for Q2 despite the disasters in Japan and related supply-chain disruptions, particularly in the auto industry. The full recovery from those disruptions in the second half of the year will send the real GDP growth rate north of 4%, perhaps substantially higher. For example, auto industry projections suggest output should increase at about a 100% annual rate in Q3, which translates into an added 2.5 points to the real GDP growth rate in that quarter.
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